An inflection point in property prices was reached early last year. After a half decade of uninterrupted collapse, prices nationally have been broadly stable since.
Is the year-long period of stability a ledge on which prices are perching before they fall further, or a floor from which they will rise, as economists at the Central Bank have recently suggested?
As with economic growth, forecasting with any precession the property market – which is inherently connected to developments in the wider economy – is impossible. One only has to recall the many so-called experts who parroted the line right up to 2007 that “the fundamentals of the property market are sound going forward” to see how wrong forecasts can be.
Today, the fundamentals of the market are anything but sound. However, weighing up the many relevant demand and supply issues allows some assessment of prospects.
Bricks of demand
Demographics will provide support to prices because the number of households continues to rise owing to an expanding population and a long-run trend towards smaller households.
Deflation in any market causes would-be buyers to delay purchases because they believe they can buy the same item more cheaply in the future. The year-long period of property price stability should convince many that the half decade of deflation is over, thereby luring those waiting on the sidelines to buy.
If the above demand factors are putting upward pressure on prices, the lack of mortgage availability is doing exactly the opposite. New mortgage issuance is at one-tenth of the peak and far below the levels that would prevail if the banking system wasn’t broken. It will not be fixed soon.
While the lack of mortgage availability makes life difficult for most home purchases, negative equity is a further obstacle to many non-first-time buyers. For those who bought after 2003 or thereabouts, selling may be impossible as it would crystallise an unaffordable loss. This is a further demand-dampening factor.
Blocks of supply
Prices in any market are set by the interplay of demand and supply. An increase in the supply of homes will push prices down, all other things being equal.
We know from construction data and planning permissions that few new homes will come on stream in the medium term, so supply won’t increase significantly from that source. But there is a chance of a significant number of existing homes coming on to the market from insolvencies and repossessions.
The belated modernisation of personal insolvency mechanisms will change the cost/benefit calculus for those deep in debt and considering resort to bankruptcy or something akin to it. But because the new arrangements are not as debtor-friendly as those of Britain, never mind the US, it is unlikely that hordes will use the changed dispensation to hand their house keys back to banks (which would lead the banks to dump the homes on the market). As such, there is likely to be a limited increase in supply from this source, with an equally limited price-depressing effect.
The strengthening of debtors’ rights is being matched with a strengthening of creditors’ rights. This could lead to a larger increase in the supply of properties on the market.
Government-imposed restrictions on banks bringing pressure to bear on those behind in servicing their debts will be eased in the near future, while a much delayed legal obstacle to repossessions is being cleared. Together, these developments will lead to repossessions rising, from a fraction of the levels in peer countries.
This should be welcomed, not dreaded. We in Ireland have a powerful folk memory regarding home repossessions dating from the 19th century, akin to the German folk memory of inflation from the 20th century. Both memories have led to irrational fears in these societies regarding repossessions and inflation.
While the case for repossessing non-performing buy-to-let loans is clear-cut – there is no social or economic rational for not doing so – the social case for limiting repossessions of owner-occupied homes is entirely different. But although nobody wishes to see Ireland going to the opposite repossession extreme from where it is now (as in Spain for example), it is neither in the collective interest nor in the interest of many who are underwater for the latter to remain in homes they cannot afford any longer.
When all the supply and demand factors are taken into account, when the context of the modest incipient recovery in the domestic economy is considered, and if the most serious risks facing the economy – sovereign default by the State and/or a euro zone break-up – do not come to pass, property prices have probably bottomed out.